Beyond the Dot.coms

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In just a few years, the Internet has had a visible impact on the daily lives of many Americans. But the recent demise of many of the "dot coms" that symbolized the Internet revolution has raised warning flags about its future.

Until now, discussion of the impact of the Internet on the economy has been mostly speculation. In Beyond the Dot.coms, two of the nation's most respected economists articulate the anticipated economic impact of the Internet over the next five years. Drawing from detailed research conducted by the Brookings Task Force on the Internet and the Berkeley Roundtable on the International Economy (BRIE) Internet Task Force (see page 10), Robert Litan and Alice Rivlin address the Internet's potential impacts on productivity, prices, and market structure.

The research suggests that the most significant economic impact of the Internet will be its potential to increase productivity growth in the existing economy —with cheaper transactions, greater management efficiency, increased competition and broadened markets, more effective marketing and pricing, and increased consumer choice, convenience, and satisfaction. The greatest impact may not be felt in e-commerce, but rather in a wide range of "old economy" arenas, including health care and government.

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Editorial Reviews

From the Publisher

"This summation of the Task Force findings should suffice for most readers." — Future Survey, 3/1/2002

"'Beyond the Dot.coms' should be required reading for anyone likely to be caught up in the next updraft. And that would be... just about all of us." —Michael Castelluccio, Strategic Finance, 3/1/2002

Co-published with the Internet Policy Institute, and written by two leading economists, this text analyzes the impact of the Internet on "old economy" sectors such as manufacturing, retail, and trucking. Drawing upon research conducted by the Brookings Institution's Task Force on the Internet, the authors contend that the Internet will have its most significant impact on the economy through productivity enhancements that lower transaction costs and improve efficiency. Annotation c. Book News, Inc., Portland, OR (
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Product Details

  • ISBN-13: 9780815700029
  • Publisher: Brookings Institution Press and the Internet Policy Institute
  • Publication date: 3/15/2001
  • Edition description: New Edition
  • Pages: 120
  • Product dimensions: 5.50 (w) x 8.60 (h) x 0.80 (d)

Meet the Author

Robert E. Litan is a senior fellow in Economic Studies at the Brookings Institution and vice president for research and policy at the Kauffman Foundation. Among his many books is Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity (Yale University Press, 2007), written with William J. Baumol and Carl J. Schramm. Alice M. Rivlin is a senior fellow in Economic Studies at the Brookings Institution and visiting professor at the Georgetown Public Policy Institute. She has been director of both the White House Office of Management and Budget and the Congressional Budget Office, and has served as vice chair of the Federal Reserve Board.

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Read an Excerpt

Beyond the Dot.coms
The Economic Promise of the Internet

By Robert E. Litan and Alice M. Rivlin


Copyright © 2001 Brookings Institution Press.
All rights reserved.
ISBN: 0815700024

Chapter One

Is the Internet
a Big Deal?

IN THE FEW years since its public launching in the mid-1990s, the Internet has proved to be a cheap, convenient, quick, and flexible means of communication for millions of people engaged in all kinds of activities. E-mail has become the standard form of communication within and among companies. Distant relatives and groups of teenage pals keep in touch on the net. Law enforcement officers use it to catch criminals. People with esoteric hobbies find each other. Churches, clubs, and community groups keep in touch with their members on the Internet. The net can be used to do research, check the weather, send invitations, make payments, trade stocks, reserve theater tickets, express opinions, listen to music, and buy or sell just about anything.

    Another fast, cheap means of communication is certainly a nice thing to have, but will it fundamentally alter the way the American economy functions? Will average people have a higher standard of living in a few years because the Internet has made the economy more productive? Or will the Internet prove to be just one more way of sending messages—an alternative to phone or fax or mail—that has little fundamental impact on our well-being?

    There is no shortage of strong opinions on the significance of the Internet. In the late 1990s the media were full of rash hyperbole predicting that information technology (IT) in general and the Internet in particular were creating a new economy. In this new economy incomes would grow more rapidly, stock values would soar, and recessions would be mild and infrequent. Confidence in the future of electronic commerce produced an explosion of new companies—the dot.coms—that attracted optimistic investors and turned young entrepreneurs into instant millionaires, at least on paper. Skeptics urged caution, but confidence in the future of the Internet ran high, and the stocks of companies soared—for a time. Then the bubble burst. Investors lost confidence in dot.coms with vague prospects but no profits. stocks plummeted, as did stocks of Internet technology suppliers, and many dot.coms went bankrupt. The skeptics crowed that they had been proved right, and some voices predicted an "Internet depression" with prolonged distress in the world economy caused by the bursting of the Internet bubble in the United States.

    In this book we try to steer clear of both the hype and the gloom. Our aim is to present as realistic a picture as possible of the potential impact of the Internet on the U.S. economy over the next few years. We focus primarily on the Internet's potential effect on productivity growth (increase in output per hour worked), because productivity growth is the principal determinant of the rate at which the nation's standard of living increases.

    As we discuss in greater detail in chapter 2, productivity growth is both variable and hard to predict. Productivity grew rapidly (almost 3 percent a year) in the United States from the end of World War II until 1973 and then slowed down unexpectedly. For more than two decades productivity grew at a sluggish pace, at about half its previous rate. Wages and the average standard of living grew slowly as well. Then, just as unexpectedly, in 1995 productivity growth began to accelerate back to something short of its previous rate—and the nation's standard of living accelerated with it.

    Beginning in late 2000 the booming economy of the 1990s slowed, and in late 2001 it fell into recession. The big question now is whether the high rate of productivity growth enjoyed during the last half of the 1990s will resume when economic growth picks up again. Was the acceleration in productivity growth a temporary phenomenon associated with the particularly favorable combination of circumstances that prevailed in the second half of the 1990s? Or is there a good chance that the United States has moved to a high trend rate of productivity growth that may be sustained for some years to come? Part of the answer to this question turns on the impact the Internet will have on productivity growth during the next several years.

    Because the Internet is so new and its impact on business is just beginning to manifest itself, we decided the best approach to projecting its effect would be to look closely at the nature of Internet use by companies and organizations at the leading edge in various sectors of the economy. To that end, we brought together a group of experts on various sectors of the economy to form the Brookings Task Force on the Internet. We asked these experts to analyze the productivity gains of the companies and organizations in their sectors that were using the net most intensively and then to estimate the impact on the sectors' productivity growth over the next five years, as these practices spread to other companies and organizations. The results of these studies are summarized in chapter 3. The studies themselves are brought together in a separate volume.

    The assignment we gave the sector experts was a daunting one, and their results must be regarded as educated guesses. Nevertheless, the answers were encouraging. The analyses indicate that the impact of the Internet on productivity in most sectors is just beginning but that it is likely to be significant. We believe that the Internet is likely to add roughly 0.25-0.50 percent a year to U.S. productivity growth (above what it otherwise would be) over the next five years. Perhaps surprising to some, virtually all of the impact will be on old economy sectors, including manufacturing, financial services, transportation, and retailing. Some of the impact also will come from cost reductions in noncommercial sectors, including government, health services, and education.

    Much of the contribution of the Internet to productivity growth will arise not from new activities, but simply from faster, cheaper handling of information needed in ordinary business transactions, such as ordering, billing, and getting information to employees, suppliers, and customers. Information-intensive sectors, such as financial services, health services, and government are likely to see their transactions costs cut substantially. Some of the productivity improvement will come from firms using the Internet to manage supply chains more efficiently, improve scheduling, reduce inventories, and bring about more effective collaboration among different business partners. Increasing use of the Internet in a rapidly globalizing economy is likely to increase competition by broadening the reach of the market for both buyers and sellers. Increased competition may enhance productivity and may also shave profit margins. Ironically, the bursting of the Internet stock market bubble in 2000-01 may enhance its productivity-enhancing effects in the old economy as many former dot.commers take their skills to more conventional firms.

    Not all of the economic benefits of the Internet will show up in productivity statistics. Consumers will benefit from increased convenience, a wider range of choices, and the opportunity to acquire products customized to their specifications. They may also benefit from fewer mistakes in processing information, which, in the case of improved accuracy of medical records, for example, may even save lives. In chapter 4, we discuss some of these hard-to-quantify benefits and why they are important even if they never enter the measured output of the economy.

    How rapidly the potential economic benefits of the Internet are realized depends on three factors: width, depth, and speed. Increasing the width of the market of Internet users requires bridging the "digital divide," the invisible barrier that divides those who are comfortable with using computers and navigating the net from those who are not. Since the nonusers tend to be older, less educated, poorer, and minorities, bringing them into the Internet marketplace will take sustained and imaginative effort—one that may not fully play out for a generation.

    Just because a company is using the net does not mean it has reorganized its operations at a depth necessary to take maximum advantage of the productivity-enhancing potential of the technology. Training employees to think differently and adapting business culture to take advantage of the Internet may well be more challenging than increasing the width of the Internet marketplace. Increasing the speed of the Internet, primarily by accelerating access to broadband connections, will also influence the realization of potential Internet benefits. So will resolution of policy issues involving security, privacy, intellectual property, and antitrust law. These issues are discussed in chapter 5.

    In sum, we are optimistic about the future of the net and its effect on individual well-being. We believe that the impact of the Internet on the economy, while not as overwhelming as extreme cyber-enthusiasts claim, is likely to be positive, significant, and sustained. As we discuss in chapter 6, the impact of the Internet reaches well beyond the dot.coms. Indeed, the bursting of the bubble represents in part the failure of investors to realize that the importance of Internet technology lies primarily in its potential to improve the efficiency of the whole economy, not in new adventures in retail e-commerce. Similarly, while the Internet has certainly not abolished the business cycle or management miscalculation, it may help reduce inventory fluctuations. We see no evidence that the world is doomed to an Internet depression, but rather see far more light than darkness in the years ahead as the Internet revolution proceeds.

Excerpted from Beyond the Dot.coms by Robert E. Litan and Alice M. Rivlin. Copyright © 2001 by Brookings Institution Press. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

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Table of Contents

1 Is the Internet a Big Deal? 1
2 Why Productivity Is So Important 7
3 Productivity and the Internet: What Lies Ahead? 19
4 Benefits of the Internet That May Not Show Up in the GDP 45
5 Realizing the Internet's Potential 65
6 Concluding Thoughts 101
Notes 121
Index 125
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